Raja Bahaduri Dhanraj Girji v. Raja P. Parthasarathy Rayanimvaru and Others.

Ptrtha1aratl1> Royanim~aru GAJENDRAGADKAR, J.-[ After disposing of Gajendragadkar .T. Civil Appeals Nos. 343 and 344 of 1959, his Lord-ship proceeded as follows.]

That takes us to Civil Appeal No. 345 of 1959 in which the appellant wauts liberty to procee~ againat the surety, respondents Nos. 2 and 3. This · claim has been rejected by both the High Court.

But the decision· of the High Court proceeds on the basis that the appellant was himself a defaulter and so, he could not be permitted to enforce his ·remedy against tho sureties. Since on the question of default, we have come to a ·contrary. conclusion, it becomes necessary to examine whether the appel· lant is entitled to se~k his remedy against the surety.

In determining this'question, it is necessary first to enquire into the nature and extent -of the liability undertaken by respondents Nos. 2 and 3 in executing the surety bond. The surety bond was executed on the 2~th Sept-. 1935. Clause 5 of the surety bond which is relevant provides that the sureties covenant that if the order of the High Court in C. M.A. No. 362/1929 be reversed or varied by the Privy Council and as a result of the said varia-tion or reversal respondent No. l becomes liable to pay by way of restitution any amount to the said appellant in the Privy Council, the sureties would pay whatever sum may become payable by the said respondent and that if they failed therein, then any sum payable shall be realised in the man-ner specified in the said clause. This bond was ' executed in the favour of the court.

924 SUPREME COURT-REPORTS [1963]

19~2 The appellant contends that. as a resq.lt of

. the decision of the Privy Council, the matter was Raja BallaUu,. remitted to the trial Court for ascertaining the DhanraJ •• Qbji amount due to the appellant and it was during the Raja P. pendency of the appeals which were pending in the Parthasarath.1 Ra,Yanimvaru Madras High Court against the deci8ion of the trial

Court on the applications made by the respective Gajendraga!-kar J. parties in the remanded proceedings that the com-

promise decree was passed between the appellant and respondent No. l and so whatever is claimable by the appellant by virtue of .the said comprpmise decree must. attract the operat.ive portion of clause 5 of the surety bond. On the other hand,. Mr. Sastri for the surety agrees that the surety bond must be strictly construed and it is only if the amount claimed by appellant from respondent No. l can be said to be the result of the reversal or variation by the Privy_ Council of the orders under appeal before it that the surety bond can be proceeded against. Mr. Sastri urges that when disputes were pending be- . tween the appellant and respondent No. l before the Madras High Court, the parties compromised the dis-putes and the compromise decree which followed acts as a discharge of the liability of the sureties. In sup-port of this argumerit, i·eliance is placed on 'the · equitable principles under lying section 135 of the Indian Contract Act. Mr. Kuppuswamy contests this position and urges that S. J 35 is inapplicable to. a surety bond executed in favour of a court and he argues that appellant's remedy against the snrety is not affected by the fact that the dispute between the appellant and respondent No. 1 was amicably settled and terminated in a. compromise decree. This controversy raises the question as to whether s. 135 of the Indian Contract Act or principles underlying it apply to surety. bol)ds executed in favour of the court. Section 135 provides that a contract between the creditor and the principal debtor, by which the creditor makes

a composition with, or promises to give time to, 1962. or not to sue, the principal debtor discharges the surety, unless the surety assents to such contract. Raja Babadur l,har.raj Girji There can thus be no doubt that ·v. & Raja P. contract of suretyship · to . which s. 135 Prrthafar:athy applies would be unenforceable if the debt Royanimv ... ru in question is compromised between the debtor and the creditor ·without the aRsent of the surety. Gajendragadkar J, But this provi:iion in terms can.not apply ·to a surtity who has executed a bond in favour of the court, because such a contract of guarantee of suretyship doefl not fall within the scope of a. 126 of the Contract Act. · A ontract of guarantee . under the said section postulcates the existence of the surety, the principal debtor and the creditor, and thh1 requirement is not satisfied n the case of a bond executed in favour of the conirt. Such a bond is given to the court and not to the creditor and it is in the discretion of the ·court to enforc the bond or not. Therefore, there cannot' be any doubt that in terms, the provisions of s. 135 cannot apply to a court bond. ·

It is also clear that the equitable principfos underlying the provisions of s. 135 apply to such a bond. If, for instance, the decree-holder gives tinie. to the j~dgment-debtor and promises not to seek his . remedy against him during that period, there is no reason why the extension of time granted by the creditor to the debtor should not discharge the surety even where the surety bond is executed in favour of the court. T'ie reas1n for the equitable rule which entitle'! the surety to a discharge in such circumstances is that tbe surety should be \Jobie at any time to require the creditor to c'l.11 upon the principal debtor to pay off his debt or himself pay off the debt and seek his remedy against the principal debtor. If the creditor has bound himself not to claim the debt from his principal debtor, that materially affects the right

. of the surety and so, whenever time is granted Raja Bah.adur ti) the debtor by the creditor without the consent Dhanra; Gi1ji of the surety, the surety can claim discharge. This

v. equitable principle would apply as much to a surety RafaP.

Parthasaratl)y bond to which s. 126 of the Contract Act applies RayanimMru as to a surety bond executed in favour of the court. <Jaj1ndragadkar J. Therefore, we see no justificatiop for the argument

that even the equitable principles underlying the .provisions of s. 135 of the contract Aot should not apply to surety bonds executed in favour of the court. ' . · · · In determining the question as to whether · liability under suoh a surety bond is discharged by

reason of the fact that a compromise decree had been passed in the judioial proceedings in which the surety bond cam13 to 'be executed, it will always be necessary to examine the terms of the bond itself. Did. the surety contemplate when he executed the bond that the dispute pending between the debtor and the creditor may lie compromised, or did he contemplate that· the dispute would, and must be settled by the court and not compromised· by the parties? If the terms of the bond indicate that the surety undertook the liability on the b;i.sis that the disp11te would be ·decided on the merits by the court in invitium and would not be amicably settled, then the compromise of the dispute would discharge the liability of the surety (vide The Official Liquidators, The Travancore National & Quilon Bank Ltd. v. The Official Assignee of Madras, (1) Parvatibai v. Vinayak Balvant ('); M ahomedalli Ibrahimji v. Laxmibai; ( '); NarsiTIJ}h Muhton v. Nirpat Singh(') and Muhammad Yusaf v. Ram Gobinda Ojha. (.') If, on the other hand, from the term.a of the bond it appears that it was within the contemplation of the parties including the surety (I) l.L.R, !944 Mad .. 708. (2) l.L.R.1918 Born. 794. (3) (1929) l.L.R. LIV BO!ll· 118. (4) (i932) I.L.R. XlPa!liaS90. (S) 11927) I.L.R. LV Cal. 91, that the dispute may be amioably settled and the 191JS surety exeouted 'the bond knowing that his liability Raja Bah•1fir may arise even under the compromise decree, then Dhan¥aj I -ir;i the of the compromise decree will not entitle v.

passim~ Ra3a.P: him to claim discharge vide H aji A~med v. MaruJ,i • Parthasarathy Ramji; (e) Appunnz' Naz'r v. !sack Mackadan, (7) and Rayan imoaru K anaz'lal Mookerjee v. Kali Mohan Chatterjee (8). The Gajendragadkar J. question would thus always be one of construing the surety bond in order to decide whether .a compromise decree discharges the surety or not.

Turning to the bond passAd by respondents Nos. 2 and 3 in the present case, it .is impossible to hold that it was within the contemplation of the suretifl8 when they executed the bond that thfl parties would amicably settle their dispute in the manner they have done. At the time whfln the surety bond was executed; the dism1te pending between the parties was the money dispute t,he decision of which would have ended in an order directing one party to pay anotheF a certain specified amount. The compromise decree· has in.troduced complicated provisions for the. satisfaction of th.e appellant's claim against · respondent No. · 1. Under the compromise decree, the appeJ.litnt would have been entitled to take possession of the properties in suit and' in that process, rival claimR of bot.h the parties would have beAn adjuste<l. We· are satisfied that the material terms in clause 5 of the surety bond could not be said to be attracted when tlie parties.

chose to scittle their dispute in accordance with the terms of the compromise agreement. Besides, it is clear that the coi:noromise agr11ement gave time to responcient No. l and the decree was, therefore, not executable immediately after it was· passed.

In substance, by the decree, time was grant.ad though it is trmi that time was granted to both the parties to disoharg11 their respective obligations under

(I!) (1930) I..J:..R. LV F.om 97. . (71 (1919) I.L.R. 43 ,Mad.1?2:

(8) A.J.R, 1957 Cal 645. . .. ·

. 928 SUPREME COORT REPORTS [1963]

1962 the compromise. That is another reason . why we think the liability of respondents No. 2 and 3 under Raja Bahadur the surety bond is discharged as a result of the 9" Dhanraj Girji ...

•• > compromise decree.

Raja P. .

Parihasarathy There is yet another consideration which is liaya1,iinvaru

--· relevant in dealing with this point. It is common <JaJendraga~kar J. ground that amongst the disputes which were settled

between the parties was included.the claim made by respondent No. 1 for damages on account of the fact that the appellant bad created occupancy rights in favour of strangers in respect of the properties which were in bis possession as a mortgagee. This claim is plainly outsid" the proceedings contemplated and permitted by the order passed by the Privy Council, and yet this dispute has been settled by the compromise decree which means that a matter which was strictly not germ.an·e to: the judicial proceedings in which the surety bond was executed bas been introduced by the parties i'n their final settlement. Therefore, we are satisfied that though· the appellant succeeds in showing that he was not & defaulter, be cannot seek his remedy against the surety, re~pondents·Nos. 2 and 3, · An attempt was made by. Mr. Kuppuswamy to suggest that respondents Nos. 2 and 3 should not hav.e been allowed to raise this point before the High Court, because no such point had been taken by them in the trial Court. We do not think there is any substance in this argument. It is true that respondents No. 2 and 3 did not ta\'e any such contention in the trial Court, but that may be because parties had then concentrated on the issue as to who was the defaulter. But when the appeals were argued before the High Court, this point was specifically urged by respondent No. 2 and it has been considered by the High Court. No doubt Mr. Ku P"swamy ingeniously suggested that this was nut a pure question of law and so, the High Court should not have allowed it to be raised for the first 19/JB time in appeal. The argument is that if the point had been raised in the Court of first instance, t,he Raia Bahalur Dhanraj Girj appellant would have shown that respondents Nos. 2 v •. and 3 had consented to the compromise agreement RajaP. Par thasar. IA' between the appellant and respondent No. 1. -This Rayanimva1_u is clearly an afterthought. If the appellant's case was that respondents Nos. 2 and 3 were not dis· Gaj1dnragadkar J;: charged by the compromise decree because they were consenting parties to the compromise agreement, they shoµld nave stated so before the High Court and the High Court would then have either called for a fineling on that issue or would have refused permission to respondents Nos. 2 and a to raise that point. · ·

The result is, Civil Appeal No. 345 <>f 1959 fails and is dismissed with costs.

Appeal dismissed.